Tuesday, May 29, 2012

Writing off the public interest

I'm starting to think there are not a lot of differences between the financial mechanisms used by managers of private equity companies that own hospitals and those used by managers of dominant non-profit hospitals.  But the source of funds is very different.

In a letter to the editor of the New York Times, Timothy Green, from Wellesley, MA, responded to an earlier op-ed by columnist David Brooks.  This is his letter:

I’d like to make three points in response to David Brooks’s defense of private equity. 

First, when you load a company with debt, you remove any margin for error. I can think of legions of companies with stodgy managements and tired business models that invited buyouts because they could theoretically generate predictable cash flows to justify excessive leveraging. They failed when ambitious projections were not met; without a buyout they might have muddled through. 

Second, look at whose capital is at risk. When a private equity firm recoups up front much of its investment through hefty management fees and upfront dividends, they drain cash and cease to have the same “skin in the game.” 

Third, these firms are often driven by short-term objectives: maximize profits to flip the company through an initial public offering or strategic sale. They may bring in expertise, but the executives are disproportionately compensated, particularly when the company fails. 

A couple of days later, I read this report by Robert Weisman in the Boston Globe:

Taking a nearly $110 million write-off on an electronic health record system it will scrap, Partners HealthCare System Inc. reported Thursday that its second-quarter operating income dropped to $5.3 million from $71.2 million in the same period last year.

“The game’s going to be won in the future off the flow of information,” said Partners' chief financial officer.... Partners officials believe the new information system, which is expected to cost between $600 million to $700 million, will lead to more coordinated patient care and have a life cycle of at least 10 years.

Does anyone else out there join me in having trouble imagining a non-profit that has the financial capability to write off $110 million and then spend $600-700 million more?  Unlike private equity -- which is able to invest in companies and write off loses because of large underlying capital commitments from investors -- the sources of funds for a non-profit hospital system are mainly patient care revenues received.  We have previously learned that this particular health care system has the ability to spend a billion dollars on new facilities.  Now, we add this write-off and immense investment in information systems to "win the game."  It seems to me that they have already won the game, having drawn the card for monopoly rents from the so-called "health care market."

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